Why Mosman Oil And Gas Ltd Has Surged 100% In A Week

It’s very easy to speculate that the shares of tiny companies whose market value is only a few millions could surge or plunge in a flash based on little evidence provided by fundamentals and trading multiples — this is not our approach at The Motley Fool. It is also the necessary premise when it comes to debating the prospects of Mosman Oil & Gas (LSE: MSMN), a £12m-market-cap firm whose stock is up 22% today but has risen over 100% in the last five days of trade. 

Indian Summer 

Oil explorer Mosman has a total of ten permits to accepted permit applications in New Zealand and Australia. It’s looking at deals to boost its growth trajectory. On 11 September, the group said that board had noticed “the recent rise in the company’s share price“.  

As noted in the announcement made on 3 September,” the group said, “Mosman intends to finance its share of the company’s proposed acquisition of up to a 70% interest in NZ producing oil and gas assets which include the Rimu, Kauri and Manutahi fields from Origin Energy Limited (the “STEP Project”), through a combination of existing cash, sale of a royalty on future production, debt, equity, and convertible securities.” It added that discussions are being held with “various finance providers” and further updates will be released to the market as appropriate.

Following today’s statement, according to which Mosman had sold a 2% royalty to Canada’s Ridge Royalty for NZ$4m, we should expect more news over the next few weeks, although this kind of negotiations could drag for months. That is a risk you should consider if you are invested or if you plan to snap up its shares. 

STEP NZ$4m Royalty Funding

The sale of the STEP Royalty for NZ$4 million provides funding for 40% of Mosman’s purchase of the recently announced STEP Acquisition,” Mosman said today, which could mean that the company is very close to securing all the additional funds that it needs in order to finance the balance of up to 70% of the STEP deal. That said, Mosman’s intention is to own at least 40% and no more than 70% of the project and is actively considering further offers from potential joint-venture partners, it said on 3 September. 

The remaining 30% of the STEP Acquisition is being acquired by WRDLS Pty,” it noted, while the total value of the deal NZ$10m (approximately £4.2 million) is expected “to be paid in two tranches following the 5% deposit which was paid by Mosman in early September“. The full details of the project can be found here.

So, should you bother?

Well, consider that in June Mosman raised £400k via a placing of 16m new ordinary shares priced at 2.5p as the company planned to acquire assets and invest in drilling activities. The stock currently changes hands at around 8p, and further dilution should not be ruled out, in my view.

Its stock price is essentially flat since the turn of the turn of the year, while its 52-week trading range is 1.85p – 23.75p. If you invest in it, you must be prepared to record either outstanding returns or hefty losses, yet at this point in time it’s very difficult to say which way Mosman’s stock price will go. Personally, I’d be cautious to splash out top dollar at between 10p and 20p a share — which implies a market cap of up to £30m — based on the value of its STEP project.

Frankly, Mosman is tempting but I'd rather choose a small-cap that is rallying hard, yet whose stock has the potential to deliver returns higher than 200% into 2016!

In our new FREE report, our analysts rightly argue that a strong balance sheet and a decent pipeline could see its valuation surge quite rapidly from its current level. 

Do not wait any longer to investigate our findings: get your FREE copy right away!

 Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.